22 July 2008


Paul Krugman writes:

"These prolonged recession-like episodes probably reflect the changing nature of the business cycle. Earlier recessions were more or less deliberately engineered by the Federal Reserve, which raised interest rates to control inflation. Modern slumps, by contrast, have been hangovers from bouts of irrational exuberance — the savings and loan free-for all of the 1980s, the technology bubble of the 1990s and now the housing bubble."
"Ending those old-fashioned recessions was easy because all the Fed had to do was relent. Ending modern slumps is much more difficult because the economy needs to find something to replace the burst bubble."

Hopefully that something isn't another bubble. My previous post touches on unsustainable growth and the inevitable consequenses of it. Instead of having more frequent mild recessions we try to to stay pain free for as long as possible (doing anything necessary to achieve this goal) in the present even though ultimately we must come crashing down to reality. It just doesn't make sense to me.

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